In order to assess and manage credit risk, lenders generally rely on credit scores provided by third parties such as the FICO™ credit score provided by Fair Isaac Corporation® of Minneapolis, Minn. Such scores are generally ineffective as they are determined based on a predictive methodology which utilizes historical data. For example, borrowers with little credit history may not be assessed accurately based on quantitative, algorithmic, and/or predictive methodologies utilized by such consumer or credit reporting agencies. This is due to a lack of transaction history of the borrower and the extended time period required for a credit score to update in response to a change in the borrower's financial circumstances. Further, it may be possible for borrowers to inflate their credit scores using techniques that manipulate the parameters considered in the credit score calculation.
Ratings agencies in the corporate, organizational, and public entity contexts also assess risk and provide related services through quantitative models that predict the likelihood of default, volatility and risk. Such predictive methodologies are similarly deficient and unable to accurately assess credit risk.
In order to mitigate the inherent risk in any lending transaction, a collateral arrangement allows a bank, investor, and/or lender, to take temporary or escrowed possession of the borrower's asset (e.g. cash or equity). This provides a means of security in the event a borrower defaults, in which case the lender may take possession of the collateral. However, in such collateralized transactions, the collateral may be depreciating disproportionately and may not at all times be adequately valued with respect to the outstanding loan. Accordingly, collateralizing transactions with physical assets is susceptible to volatile market conditions, which inherently increases lender risk.
In addition to collateral arrangements, many transactions are guaranteed by at least one third party guarantor willing to assume liability on behalf of a borrower in the event the borrower defaults. Unfortunately, analysis of the credit risk of each guarantor is generally also limited to the guarantor's credit score and any of the guarantor's assets. While multiple guarantors generally reduce the overall risk to a lender, assessment and management of risk in such transactions still suffer from the deficiencies identified above. Moreover, a third party guarantor's ability to accurately assess and manage the borrower's credit risk may be limited due to a lack of information, social or other personal relationships, and/or direct knowledge of the borrower's financial circumstances. Additionally, the inability to qualitatively assess credit risk, and/or use of flawed quantitative assessment data, can result in increased risk to the guarantor.
What is needed is a system and method for collateralizing transactions by managing, mitigating, and distributing risk based on quantitative assessment of social, trust, and/or reputation-based guarantees by third parties.